TMI Blog1958 (12) TMI 28X X X X Extracts X X X X X X X X Extracts X X X X ..... counsel confined his argument to the first item alone obviously because, on the facts found, no objection as to the second could be legally sustained. The facts, so far as necessary, may be shortly stated. The petitioner is a registered firm with its headquarters at Kakinada (which prior to the formation of Andhra State was included in Madras State) carrying on business in oils, pulses, tamarind etc., under the name and style of Messrs Bachu Subba Rao and Company. During the period 1950-51 the firm entered into transactions of sale covered by the first item with merchants outside Madras State. The contracts of sale were entered into within the State. The goods contracted for were also in the State. The sales being on the F.O.R. basis, the goods were sent by rail and the railway receipts were obtained to self, the goods having been consigned to self. The railway receipts were negotiated through banks and the buyers in each case were to pay the hundi amount and take the railway receipts from the banks situate outside the State. The goods could then pass into the hands of the buyer. Thus, the actual delivery in each case took place outside the State. The transactions were however a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for on behalf of the respondent is that the State has plenary powers to impose sales tax on all transactions of sale even if they be in some parts concluded outside that State provided only in that event there is sufficient territorial nexus and this power cannot be defeated unless the person claiming immunity establishes exemption or prohibition under the Constitution in his favour.Thus the controversy between the parties raises a substantial question as to the interpretation of Article 286 of the Constitution of India. But, before we consider how far and in what respect the powers of taxation in relation to sales enjoyed by the State Legislature are modified or abridged by Article 286 of the Constitution, we have to ascertain what exactly are the powers conferred on the State Legislature in relation to such taxes. Article 265 enacts that no tax can be levied or collected except by authority of law. Article 245 provides that the Legislature of a State may make laws for the whole or any part of the State. Article 246(3) of the Constitution, as it stood at the relevant date, reads thus: "Subject to clauses (1) and (2) the Legislature of any State specified in Part A or Part B of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved for the consideration of the President and has received his assent." Thus it would appear the State Legislature has within its allotted field of legislation covered by item 54 has, by reason of Article 246 (3), exclusive power to make laws for the State or any part thereof with regard to taxes on sales or purchases subject, of course, to the restrictions, if any, placed by Article 286 of the Constitution. It may be noticed that no such restrictions as are imposed by Article 286 were to be found in the Government of India Act. Though there was a provision [section 297(1)(b)] in the Government of India Act prohibiting the Provincial Legislature from imposing a discriminating tax for imported goods from other Provinces, there was no provision restricting the power of the Provincial Legislature to impose taxes on sales or purchases of an inter-provincial character. But, the power vested with the Legislature was only to be limited to making of laws for the State as it is now under the Constitution. It is well-settled that the expression "for the State or any part thereof" in Article 246(3) cannot be taken to import into entry 54 the restriction that the sale or purchase must take pl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ve effect unless it has been reserved for the consideration of the President and has received his assent. These are the four bans imposed on the hitherto practically unrestricted power of taxation for State Legislature. These are the bans which were considered necessary having regard to different aspects of sales and purchases of goods. They are separate and independent restrictions. As has been observed in the majority decision of Bengal Immunity Company Ltd. v. State of Bihar[1955] 6 S.T.C. 446; A.I.R. 1955 S.C. 661, at 676., "These several bans may overlap in some cases but in their respective scope and operation they are separate and independent. They deal with different phases of a sale or purchase but, nevertheless, they are distinct and one has nothing to do with and is not dependent on the other or others. The States' legislative power with respect to a sale or purchase may be hit by one or more of these bans. Thus, take the case of a sale of goods declared by Parliament as essential by a seller in West Bengal to a purchaser in Bihar in which goods are actually delivered as a direct result of such sale for consumption in the State of Bihar. A law made by West Bengal witho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... factor it produced in certain cases results which could not be encouraged. In order to solve this difficulty, Explanation to Article 286(1)(a) has been introduced which by means of a legal fiction provides that the State in which the goods sold or purchased are actually delivered for consumption therein is the State in which the sale or purchase is considered to have taken place notwithstanding that the property in such goods under the general law relating to sale of goods passed in another State. It may be seen that an outside sale in Article 286(1)(a) has been explained by defining what an inside sale is. As observed in State of Bombay v. United Motors Ltd.[1953] 4 S.T.C. 133 at 145; A.I.R. 1953 S.C. 252., the test of sufficient territorial nexus was as a result of this explanation replaced by a similar or more easily workable test which is: " Are the goods actually delivered in the taxing State, as a direct result of a sale or purchase, for the purpose of consumption therein? Then, such sale or purchase shall be deemed to have taken place in that State and outside all other States. The latter States are prohibited from taxing the sale or purchase; the former alone is left free t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y goods shall be deemed, for the purposes of this Act, to have taken place in this State, wherever the contract of sale or purchase might have been made(a) if the goods were actually in this State at the time when the contract of sale or purchase in respect thereof was made, or (b) in case the contract was for the sale or purchase of future goods by description, then, if the goods are actually produced in this State at any time after the contract of sale or purchase in respect thereof was made." Explanation (2) was introduced by the Amending Act XXV of 1947. In Poppatlal Shah v. State of Madras[1952] 3 S.T.C. 396. , which was a case relating to the period prior to the introduction of explanation (2), the learned Judges of the Madras High Court held the view that the word "sale" has both a legal and a popular meaning, that in the legal sense it meant passing of property in the goods and it is in that sense the word is used in the Sale of Goods Act, that in the popular sense it signifies a transaction which results in the passing of property, that as the object of the legislature in the Sales Tax Act is to impose a tax on the occasion of the sale, it was immaterial whether a sale had ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds by description, if the goods were actually produced in the Province at any time after the contract of sale or purchase in respect thereof was made. Thus the presence of goods within the Province at the time of the contract or of future goods at any time after the contract even though the actual delivery of goods might have been effected outside the Province, would by reason of explanation 2 to section 2(h) of the Madras General Sales Tax Act (IX of 1939) render the sale as having taken place within the Province. This was the law at the time of the Constitution, the validity of which was placed beyond all controversy by the observations in the above-mentioned decision. The advent of the Constitution however has changed the position only so far as it has imposed certain bans in Article 286. But for these, no taxation made in compliance with the Madras General Sales Tax Act could have been challenged as illegal or unconstitutional. These bans, four in number, as already pointed out, are independent of each other though there may be cases wherein they overlap. Some of these are absolute while some others are conditional. The circumstances of this case can possibly attract only the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only an outside sale and as such cannot be taxed by that State. As pointed out at page 484 in the Bengal Immunity Company Ltd. v. State of Bihar(1), an outside sale need not necessarily be an inter-State sale. But an outside sale sometimes contains only inter-State elements. The difficulty would arise only in such cases. Unfortunately, the explanation introduced by the Constitution fixing the situs in such cases does not effectually cover all cases of sales or purchases to which the States may set up their claims on the basis of nexus theory. The observations of his Lordship, the Acting Chief Justice, were in this behalf in Bengal Immunity Company Ltd. v. State of Bihar[1955] 6 S.T.C. 446 at pp. 474 and 484; A.I.R. 1955 S.C. 661., "When Parliament will lift the ban imposed by clause (2), the Explanation will continue to operate, so that inter-State sales or purchases falling within it will still be deemd to have taken place in the delivery State and, therefore, outside all other States none of which latter States will, by reason of the ban imposed by clause (1) (a), be entitled to tax such sale. The ban under clause (2) being lifted the delivery State will become free to tax such s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e some of the questions which may arise as and when Parliament will choose to make a law in exercise of the powers conferred on it and it will then be time enough to discuss and decide those questions." This passage makes it abundantly clear that the Explanation is not exhaustive of all the cases of outside sales involving inter-State elements and the question may therefore yet arise as regards the claims of States for taxation on such sales or purchases. The transactions of this kind being out of the ambit of the Explanation and also of Article 286(2), as that ban is for some time lifted unconditionally, the taxing power of the State Legislature stands unfettered by any consideration other than its powers of taxation under the provisions of the Constitution of India. In that case, having regard to the composite nature of the sale the nexus theory will be inevitably drawn for fixing the situs. It has been observed in Bengal Immunity Company Ltd. v. State of Bihar [1955] 6 S.T.C. 446 at p. 479. by Das, Actg. C.J.: "The situs of an intangible concept like a sale can only be fixed notionally by the application of artificial rules invented either by Judges as part of the judge-made l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s the situs is determined to be in one place by judicial fiction, i.e., a fiction enunciated by judicial decision, the inter-State character of the transaction must cease. The majority hold that this is the result when the situs is placed in only one State, namely, the delivery State, because of the fiction which the Explanation creates. The same result would have to follow logically if the situs were to be established by judicial fiction instead of by a constitutional one."It is evident from this passage also that the restrictions placed on the taxing power of States in relation to outside sales determined by the fictional or notional situs in the Explanation do not go beyond what the Explanation contemplates. The cases not hit by the other bans and not falling within the Explanation are, of course, to be dealt according to the law of the State recognising the doctrine of sufficient territorial nexus. It is, therefore, argued that since the assessee has failed to establish the exemption that he claims against taxation, his case should be governed by the Madras General Sales Tax Act and the goods being at the time of sale admittedly in the Madras State the case is covered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce has been placed on Sakhigopal Cocoanut Growers Co-operative Society v. State of Orissa[1953] 4 S.T.C. 372, 375., and Rama Purchase Sale Society v. State of Madras[1953] 4 S.T.C. 372, 375. In the first-mentioned case it was held that the taxes on sales and purchases involving inter-State elements cannot be levied by any State other than the State in which the goods are delivered for purposes of consumption and that this conclusion is based on the following passage in the majority judgment in State of Bombay v. United Motors (India) Ltd. [1953] 4 S.T.C. 133. "We are, therefore, of opinion that Article 286(1)(a) read with the Explanation prohibits taxation of sales or purchases involving interState elements by all States except the State in which the goods are delivered for the purpose of consumption therein in the wider sense explained above." But it would appear from the passage in Bengal Immunity Company Ltd. v. State of Bihar[1955] 6 S.T.C. 446. cited by us in an earlier part of our judgment only such cases of outside sales as are covered by the Explanation fall within the ban of Article 286(1)(a). Needless to say that the ban under Article 286 was intended for only such sale ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te unless it can be postulated that there is a State in respect of which a particular transaction is an inside sale by reason of the Explanation." These observations do not negative the contention that the Explanation is not exhaustive of all cases of outside sales and that there can be outside sales which though incapable of being ascertained on account of the inapplicability of the constitutional fiction they may as well be determined with the help of the general law. If by general law their Lordships intended the law fixing the silus on the basis of nexus theory in cases of doubt or difficulty we respectfully agree with them. The law governing such situation must ordinarily be the law in respect of taxes on sales and purchases of goods and if besides being within the legislative competence it fixes the situs inconformity with the well-established doctrine of sufficient territorial nexus its application is certainly inescapable. It must be noted that the. Constitution has not given a go-by to this doctrine. Subject to the provisions of the Constitution it is still available for appropriate cases. As observed in State of Bombay v. R. M. D. ChamarbaugwalaA.I.R. 1957 S.C. 669 at 7 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection: "I agree with the construction which my Lord has placed upon Entry No. 54 of List II. I also agree that the object of the Explanation is to fix the locus of a sale or purchase by means of a fiction but with respect I cannot agree with my brother Bhagwati, J., that the nonobstante clause enunciates the general law on this point. I know of no general law which fixes the situs of a sale, not even the Sale of Goods Act. What the general law does is to determine the place where the property passes in the absence of a special agreement, but the place where the property passes is not necessarily the place where the sale takes place, nor has that ever been regarded as a determining factor." It is therefore clear that in matters of taxation the provisions of the Sales Tax Act, subject to the constitutional limitations, if any, shall determine the situs of sales and not the Indian Sale of Goods Act which is not concerned with the place where the sale takes place. It is argued that the Divisional Bench of this Court in the case cited above has virtually held that the situs of sale in such cases shall be determined by the provisions of the Indian Sale of Goods Act and that since tha ..... X X X X Extracts X X X X X X X X Extracts X X X X
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